Why NYSE-ICE deal is likely to be approved

NYSE, ICE plan to IPO Euronext should help smooth review: analyst

By

RonaldD. Orol

WASHINGTON (MarketWatch) — IntercontinentalExchange Inc.’s $8.2 billion blockbuster deal to buy NYSE Euronext is likely to be approved by U.S. and European regulators because the two companies businesses don’t have much direct overlap in the markets they run, according to observers.

The two exchanges said Thursday they would seek to combine, with ICE offering valuing NYSE shares at $33.12 a share, a 38% premium over Wednesday’s closing price. The two firms said they expect the transaction to close in the second half of 2013. Read about the deal

“I don’t expect there to be much objection,” said Larry Tabb founder of the capital markets research firm Tabb Group in New York. “This has a lot fewer regulatory hurdles than two other recent efforts to buy NYSE Euronext.”

The proposed combination comes after ICE and Nasdaq OMX Group Inc.
NDAQ, -0.17%
had proposed in April 2011 to buy NYSE Euronext
US:NYX
for roughly $11 billion. However, that deal fell apart after the Justice Department had warned it would reject the deal on antitrust grounds over the combination of two major U.S. stock exchanges and worry that one company would dominate U.S. stock listings.

A rival bid by German exchange operator Deutsche Borse
DB1, -0.64%
also was rejected by regulators.

According to reports, Jeff Sprecher, ICE’s CEO, said the transaction was well received by regulators after he and NYSE CEO Duncan Niederauer finished a tour of the U.S. and Europe ahead of the deal announcement.

Regulatory observers note that while NYSE Euronext focuses on stocks and stock-options trading, ICE’s central operations are in electronic commodity futures trading — two different business focuses.

According to a report by Financial News, the combined firms’ futures market operations would have a collective market share of 10%, making it very unlikely that U.S. regulators would reject the deal.

Susan Grafton, partner at K&L Gates in Washington, agreed that there is little overlap between the two businesses making it more likely to obtain regulatory approval in the U.S.

Certainly, she said, it would have less regulatory hurdles to overcome than the previous efforts to acquire NYSE Euronext, particularly the effort to combine NYSE and Nasdaq.

“Some of the antitrust concerns that would have come up if this was a stock exchange to stock exchange merger are not going to be present here,” Grafton said.

She noted that because ICE is regulated by the CFTC and the NYSE is overseen by the SEC, the deal will be reviewed by both agencies.

“They will both look at the transaction, but I don’t think they will find anything insurmountable,” she said.

In addition, she said, the Justice Department will look at it from a distance but also will not likely find any major problems.

Offering up a bone in Europe

Peter Lenardos, analyst at RBC in London, said that despite several regulatory reviews in Europe, he expects it won’t experience any regulatory opposition in Europe.

“Their businesses don’t overlap in Europe,” he said. “ICE has yet to establish itself as a derivatives business in Europe.”

In addition, Lenardos noted that a decision by NYSE and ICE to offer up that Euronext be subject to an initial public offering is a carrot to European regulators and should help smooth regulatory reviews. ICE said it would consider an IPO of the NYSE’s Euronext stock market business in Europe unit after the deal closes.

“The two companies are cognizant of an anti-consolidation mood, and the fact that they are offering Euronext back to Europe, trading exclusively within Europe is a sign to them they are giving European countries back their exchanges, which is a sign of national pride,” Lenardos said.

He added the European Commission will likely review the deal from an antitrust point of view and regulators in the U.K., France, Belgium, Netherlands and Portugal will examine it from a regulatory angle.

Grafton said that there will be much more scrutiny in Europe and that part of that review will focus on the proposed combination of NYSE Euronext’s U.K. futures business, Liffe, which conducts commodities trading, and ICE Futures Europe, an energy futures business also based in London.

Derivatives expertise

Tabb noted that ICE could bring some of its expertise in the swaps business to NYSE Euronext’s Liffe.

Tabb said that ICE was the first firm to create a swap future that has the same economics of traditional swaps, but since they are futures they are listed, margined, and easier to trade.

He added that these products would be subject to less of the proposed financial reform regulations in the U.S. and Europe than traditional over-the-counter swaps. He said that the combined ICE and the NYSE could bring that expertise to Liffe. Read about why ICE is buying NYSE Euronext

However, Dennis Kelleher, president of consumer advocacy group Better Markets in Washington, said he hoped regulators will conduct a rigorous review of the deal.

“This merger, like the others, needs to be aggressively scrutinized to ensure that if approved, it doesn’t harm investors and our markets even more than they are currently being harmed,” he said.

He noted that it cannot be looked at in isolation, noting that it should be reviewed within the context of two large high-speed trading firms engaged to combine with embattled Knight Capital Group Inc.
US:KCG
agreeing Wednesday to be bought by Getco Holding Co.

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